Rush Enterprises, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; filed August 7, 2020. Amounts below are in U.S. dollars. Financial statement figures are unaudited. Rush operates a nationwide commercial-vehicle dealership network, with vehicle sales, parts and service, leasing and related offerings; the Truck Segment is its sole reportable segment.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $1,002.5 million | $1,544.6 million | $2,289.2 million | $2,892.9 million |
| Gross profit | $192.3 million | $269.5 million | $426.8 million | $526.4 million |
| Operating income | $23.0 million | $61.8 million | $58.2 million | $118.7 million |
| Net income | $16.8 million | $41.6 million | $39.9 million | $78.7 million |
| Diluted EPS | $0.46 | $1.10 | $1.08 | $2.08 |
| Gross margin | 19.2% | 17.4% | 18.6% | 18.2% |
| Operating margin | 2.3% | 4.0% | 2.5% | 4.1% |
- Revenue mix and performance: Q2 new and used vehicle revenue fell 45.4% year over year; aftermarket products and services revenue fell 15.8%; lease and rental revenue fell 7.0%. New vehicle unit sales declined 48.8%, while used vehicle unit sales fell 15.8%. The improved consolidated gross margin reflected a shift toward higher-margin aftermarket revenue, even as gross profit dollars declined.
- Cash flow: First-half operating cash flow was $418.2 million, versus cash used of $31.9 million in the prior-year period. The 2020 inflow was strongly supported by a $358.9 million inventory reduction and other working-capital movements. Investing cash outflow was $74.4 million; financing cash outflow was $309.9 million. Cash increased $33.9 million to $215.6 million.
- Liquidity and debt: Management reported net liquidity of approximately $321.3 million, comprising $215.6 million cash and $105.7 million available under credit agreements, excluding floor-plan facilities. Working capital was approximately $234.7 million. No borrowings were outstanding on the $100 million working-capital facility. Balance-sheet floor-plan notes payable were $724.9 million; long-term debt was $586.3 million including current maturities; finance lease obligations totaled $106.4 million. The company said it was in compliance with debt covenants and expected available funds and operating cash flows to meet requirements for at least 12 months.
Material changes and management commentary
- Q2 revenue declined 35.1%, operating income declined 62.8%, and net income declined 59.6% from Q2 2019. For the first half, revenue fell 20.9% and net income fell 49.3%.
- Management attributed the deterioration to COVID-19, manufacturer production shutdowns early in Q2, and an expected industry downturn following strong 2018–2019 truck sales. Dealerships remained open as essential businesses, though some hours were modified. Expense reductions helped offset lower activity; SG&A fell in dollars but rose to 15.6% of Q2 revenue from 12.5%.
- Used-truck market weakness and oversupply led to inventory write-downs and lower used-vehicle margins. Aftermarket margins were also affected by lower parts rebates and purchase discounts; lease and rental margins declined with utilization and miles driven.
- Management said the worst effects may be behind the business, but expected an intermittent, gradual recovery and substantial COVID-19 effects for the foreseeable future. It could not provide full-year company guidance. Industry forecaster A.C.T. Research projected 2020 U.S. retail sales declines of 43.5% for Class 8 and 33.9% for Class 4–7 vehicles versus 2019.
- Other stated expectations: 2020 SG&A of 14.5%–16.0% of revenue; effective tax rate of approximately 26%–28%; and $30–$35 million of recurring capital expenditures. Vehicle purchases or leases for rental operations were expected at approximately $90–$110 million, depending on demand, and to be financed.
- The June 30 commercial-vehicle order backlog was $1,057.1 million, down from $1,686.6 million a year earlier; orders may be canceled. The company expected to fill most orders during 2020.
Capital allocation, risks and contingencies
- The Q2 dividend was $0.13 per share. In July, the board declared a $0.14-per-share dividend for payment in September. Management lifted the suspension of the stock-repurchase program in Q3; $20.4 million had been repurchased under the authorization by June 30.
- Interest-rate exposure is material: management estimated that a 100-basis-point LIBOR change could change annual interest expense by approximately $7.8 million, based on June 30 borrowings and debt exposure.
- COVID-19’s duration and severity remained uncertain. A prolonged downturn could pressure demand, earnings, cash generation and goodwill valuation. The company’s revised first-quarter goodwill assessment found no impairment at that time.
- The company guaranteed up to CAD 250 million of certain RTC Canada credit facilities; the filing reported a $27.2 million investment in RTC Canada, including a guaranty valued at $4.9 million. Ordinary-course litigation was not expected by management to have a material effect, but uninsured claims could be material. Environmental obligations and tax audits are additional contingencies; unrecognized tax benefits were $3.0 million.
- The CARES Act had no material effect on the financial statements as of June 30. The company reported effective disclosure controls and no material change in internal control over financial reporting during Q2.
Important facts for investors to verify
- Whether vehicle demand, aftermarket activity and margins recover as management anticipated, and how actual industry sales compare with A.C.T. Research’s forecasts.
- Whether the substantial first-half operating cash flow is repeatable: it benefited materially from inventory liquidation and working-capital changes.
- Floor-plan financing, debt maturities, covenant compliance, borrowing availability and sensitivity to interest-rate movements.
- Used-truck inventory valuation and any further impairment risk if COVID-19 effects or the used-truck oversupply persist.
- Backlog conversion and cancellations, rental-fleet utilization, capital spending, and the sustainability of dividends and share repurchases.